The federal government allows employees who are unable to work because of a mental or physical condition to retire under a disability retirement plan. This disability retirement option is for employees who are covered by either the Civil Service Retirement System (CSRS) or those covered by the Federal Employees Retirement System (FERS).
In the second of two columns discussing disability retirement for FERS-covered employees, this column discusses: (1) optional (or regular) retirement versus disability retirement; (2) calculation of the FERS disability annuity, and (3) FERS disability retirement and taxes.
FERS optional retirement versus disability retirement
A FERS-covered employee eligible for an immediate, regular retirement is entitled to receive the FERS annuity whether the employee is disabled or not. There are a several additional concerns that are important for disability annuitants – both before and after retirement – that FERS-covered employees should be aware of. Among these considerations:
- An applicant for FERS disability retirement must prove eligibility through medical and other evidence, even if eligible for regular retirement;
- A disability annuitant under age 60 must provide annual earnings reports. The disability annuity is subject to termination if the annuitant is no longer considered disabled;
- A disability annuitant under age 60 must provide medical evidence at his or her own expense. The disability annuity is subject to termination if the annuitant is found to be recovered.
- A disability annuitant who was also eligible for regular retirement would generally be entitled to an immediate, regular FERS annuity if found recovered or restored to earning capacity. However, the new annuity would be computed based on the same high-three average salary used in computing the FERS disability annuity with no adjustment for cost-of-living adjustment (COLA) increases for the period after the individual retired on disability.
- An individual must be permanently unable to work in order to be offered preferential treatment for disability retirement over regular retirement.
- An employee eligible for early voluntary disability retirement may be offered a larger regular annuity amount under the early FERS retirement rules. Therefore, both a disability annuity and a regular FERS annuity should be computed. There may also be circumstances in which non-Federal employee benefits will be affected by disability retirement.
Calculation of a FERS Disability Annuity
Disability annuity benefits are computed in different ways, depending on the employee’s age at the time of retirement and the number of years of service under FERS. Number of years of service includes “bought back” military service and temporary service at the time of retirement. For most FERS employees who retire under a disability retirement, the FERS disability retirement annuity will be recomputed after the first 12 months of disability retirement and then when the disability annuitant becomes age 62.
Those FERS employees who transferred from CSRS are covered by FERS disability retirement rules. Service that is not creditable under FERS, such as refunded FERS service and not redeposited, and temporary service performed after Dec. 31, 1988, may not be used in the computation of the FERS disability retirement annuity.
The following is the formula used in the computation of FERS disability annuity for those employees who are under age 62 at the time of being approved for FERS disability retirement.
- For the first 12 months of disability retirement, the disability annuitant receives 60 percent times his or her high-3 average salary less 100 percent of the Social Security disability benefit earned as of the date of disability retirement.
The following example illustrates:
Margaret, age 42, is a FERS employee with 12 years of service who was approved for a disability retirement. At the time of her approval for disability retirement, Margaret’s high-three average salary was $100,000. Also, at the time of her disability retirement approval, Margaret’s annual Social Security disability benefit was $24,000 per year. Margaret’s first year FERS disability annuity amount will be:
(60 percent of $100,000) less (100 percent of $24,000), or $36,000
- After the first 12 months of disability retirement, a FERS disability annuitant receives 40 percent times the high-3 average salary less 60 percent of the Social Security disability benefit the annuitant is entitled to.
Continuing with the example above:
Margaret will receive, starting in her second year of disability retirement:
(40 percent of $100,000) less (60 percent of $24,000), or $25,600
- Re-computation at age 62. The disability annuity is recomputed when the disability annuitant becomes age 62. The recomputed annuity is equal to an amount that represents the FERS annuity that the disability annuitant would have received had he or she continued working until the day before turning age 62, and then retired under FERS non-disability provision. The total service time used in the computation is increased by the amount of time that the individual received a FERS disability annuity. The high-3 average salary is increased by all FERS COLA increases that took effect during the time the individual received a disability annuity. This is true even though the FERS disability annuity did not receive COLAs during this period. The FERS basic annuity formula is then applied, equal to:
1.1 percent times year of service times high-three salary
Returning to the example above:
When Margaret becomes age 62 she would have had 32 years of Federal service. Her high-three average salary has increased to $120,000 using the COLAs that occurred between the time she retired (age 40) under a disability retirement and age 62. Her recomputed FERS annuity is computed as:
1.1 percent times 32 times $120,000, or $42,240.
If a FERS employee transferred to FERS and is eligible for a CSRS annuity component and was approved for a FERS disability retirement, then that portion of the disability retirement that comes from CSRS is computed, using the rules for CSRS disability retirement.
The following annuity computation is used for employees applying for disability retirement who are 62 or older at the time of applying for disability retirement or who are eligible for immediate retirement:
An employee receives an “earned annuity” based on the general FERS annuity computation formula if the employee is 62 or older or meets the age and service requirements for regular unreduced immediate retirement. The following table summarizes the age and service requirements for regular unreduced immediate retirement under FERS:
|Age||Minimum Number of Years of Service|
Minimum Retirement Age (MRA)*
* Age 55 to 57, depending on the year an employee was born.
An employee who is 62 and retires on disability with at least 18 months but less than five years of service will receive only the “earned annuity”.
The following are the formulas for computing the “earned annuity”.
- Employee is younger than age 62 at retirement:
1.0 percent times high-three average salary times the years and months of service*
- The employee with at least 20 years of creditable service and is 62 or older on the day of retirement:
1.1 percent times high-three average salary times years and months of service*
* includes unused sick leave on the day of retirement
The FERS “earned annuity” will be reduced if the retiring employee elects to give a FERS survivor annuity benefit.
FERS Disability Retirement and Taxes
If a FERS-covered employee retires under a disability retirement, the FERS disability annuity that is received is taxable as salary income until the annuitant reaches minimum retirement age (MRA), the age at which the annuitant could receive a regular FERS annuity were the individual not disabled. Upon reaching MRA, the disability annuity is taxed as pension income under the IRS’ “Simplified Rule”. For income tax withholding purposes, a disability annuity is treated the same as a non-disability annuity.
Disability annuitants must report all annuity payments received before their MRA on IRS Form 1040, line 7 – “wages or salary” or Form 1040A line 7 – “wages or salary”.
Disability payments for injuries incurred as a direct result of military action involving the Armed Forces of the United States and resulting from violence or aggression against the United States or any of its allies are not included in income. If an employee receives tax-exempt benefits from the Department of Veterans Affairs for personal injuries resulting from active service in the Armed Forces and later receives a FERS disability annuity arising from the same injuries, then the employee cannot treat the disability annuity payments as tax-exempt income. The disability annuity is subject to the same tax rules as a disability annuity.
Upon retiring under a disability retirement, the retiring employee is eligible to receive a lump sum payment for all unused annual leave. The lump sum payment is fully taxable in the year it is received.